American Express Co sounded optimistic about future client spending, even as Capital One Financial Corp cautioned that its customers are not borrowing as much as they used to.

Both companies posted first quarter results that handily beat analysts' expectations, signaling that consumers are getting better about paying back lenders.

But not all card issuers are seeing the same pace of improvement -- American Express's credit losses started declining in the middle of last year, while Capital One said its consumer lending losses likely peaked in the first quarter of 2010.

American Express is probably better positioned right now, said Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods.

Both companies set aside less money to cover losses, citing an improving economy where unemployment has fallen slightly and consumer spending is showing signs of rising.

American Express said its customers spent 16 percent more in the first quarter of 2010 than the same period last year. The biggest change in spending came outside the United States, where business rose 27 percent.

Higher spending helps American Express, which is increasingly trying to focus its growth on processing transactions and rely less on lending for profits. The company boosted its lending earlier this decade, only to be hit by higher credit losses in 2008 and 2009.

American Express posted shareholder profits of $873 million, or 73 cents a share, compared with $361 million, or 31 cents per share, in the same quarter a year earlier. Analysts had on average expected a profit of 64 cents a share, according to estimates from Thomson Reuters I/B/E/S.

Lending is still a crucial source of income for American Express, though. Interest income on credit card loans rose 37 percent to $1.775 billion during the quarter.

American Express' other big boost in the quarter came from setting aside less money to cover loan losses-- $943 million, compared with $1.8 billion in the same quarter last year.

The company is investing some of the money it would have set aside for credit losses, Chief Financial Officer Dan Henry said on a conference call. The company is spending money on new forms of payment processing, such as online transactions, and will consider relatively small acquisitions in that area, Henry added.

American Express's shares rose 1.1 percent in after-hours trading.

TURNING THE CORNER

American Express is ramping up its business now, something Capital One said it expects to do in coming quarters.

But the company faces headwinds, analysts said. Capital One relies more heavily on penalty fees from customers who make late payments. By the end of August, provisions in last year's credit card law will prevent lenders from charging penalty fees that are too high.

The law will affect all credit card companies, but for Capital One, this kind of disproportionately hits them. They have a more (penalty) fee-based model, KBW's Sakhrani said.

Capital One cautioned on a conference call with investors that loan demand remains weak, and that credit losses in its commercial loan business may increase.

The McLean, Virginia-based bank said first quarter profit was $636.3 million or $1.40 a share, compared with a loss of $172.3 million or 44 cents a share in the same quarter last year.

Analysts on average expected earnings of 58 cents a share, according to Thomson Reuters I/B/E/S.

The company set aside $1.48 billion to cover bad loans, down from $2.13 billion in the same quarter last year, including loans on the bank's balance sheet and sold to investors through securitization.

Results for both companies were influenced by accounting rules that moved loans bundled into bonds back onto bank balance sheets.

Capital One's shares rose 5.4 percent after-hours.

(Reporting by Maria Aspan and Dan Wilchins; Editing by Phil Berlowitz)

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